Updated: 24 Oct 2024
Protection and indemnity (P&I) liability insurance, commonly known as “P&I”, is specifically designed to address the unique needs of the marine industry. It covers practically all maritime liability risks associated with the ownership and operation of a vessel. These include third-party risks for damage caused to cargo during transit, risks of environmental damage such as oil spills and pollution, war, and political risks.
There’s no standard underwriting form when it comes to P&I insurance. Rather, underwriters will create bespoke P&I coverage for each insured, based on the nature and character of the risk, and the amount of insurance desired.
P&I insurance is often provided by a P&I club. What a P&I club is is an essentially a mutual insurance association that provides risk pooling, information, representation and risk mitigation for its members.
Typical members of P&I clubs include ship owners, ship operators, and charterers – and more recently, membership has been opened to freight forwarders and warehouse operators. A P&I club reports only to its members, and not to shareholders like a traditional marine insurance company.
So, what is P&I? What does P&I insurance cover? What does it not cover? These and more important questions will be the focus of this Insurance Business article.
In simple terms, P&I insurance is the insurance policy that ship owners purchase. This type of insurance is meant to protect ship owners from liability claims from passengers, crew, and third parties. Liability claims can include:
P&I insurance traces its roots back to 19th century London. At this time, ship owners and charterers would seek insurance for their ships, and cargo owners would get insurance for the cargo. However, the ship owners and charterers realized they could be found at fault should cargo get lost or damaged at sea. So, they sought third-party indemnity insurance for cargo liability.
Unfortunately, most underwriters in the first half of the 19th century were reluctant to take on third-party cargo liability risks. Because of this, the ship owners responded by forming mutual P&I clubs.
But as shipping volume increased in the second half of the 19th century, so did the number of insurance claims, specifically relating to collisions and third-party liability claims. During this period, it became standard for crew members to seek compensation from their employers.
Some years later, the Lord Campbell Act of 1846 enabled claims to be made by dependents of crew members who were killed on board and introduced the possibility of claims by passengers. This posed a great risk for shipowners considering the emigration boom towards North America and Australia.
In response to the growing risks and inadequate insurance coverages, the first protection association was formed in 1885, called the Shipowners’ Mutual Protection Society (later called the Britannia P&I club).
The purpose of the club was to cover liabilities for loss of life and personal injury, as well as the collision risks excluded from marine insurance policies at the time. The club was a success, and other similar associations were formed. Approximately 20 years later, the clubs started providing indemnity coverage to provide extra coverage for ship owners, hence the name P&I clubs.
Although the P&I clubs originated in London, the concept soon spread to other major shipping jurisdictions around the world. Apart from the UK, there are thriving clubs in:
Thirteen of the major P&I clubs have now joined the International Group of P&I Clubs, and together they provide P&I insurance for approximately 90% of the world’s ocean-going tonnage. As part of the group, each member club remains as an independent, not-for-profit mutual insurance association, but shares their large loss exposures, as well as their respective knowledge and expertise on marine liabilities.
These are the core functions of the group:
The International Group of P&I clubs has been around for the past 150 years, and unwaveringly providing insurance to 90% of what people use in their daily lives. Here’s a short but interesting video about the group and the service they provide to the shipping industry and the public at large:
Shipping companies need this type of marine insurance to cover the extensive list of liabilities or claims that can arise from maritime operations. P&I insurance serves to protect ship owners against a wide, and generally very costly range of potential risks and claims they may face.
Protection and indemnity insurance provides cover to ship owners, operators, and charterers for third-party liabilities encountered in the commercial operation of entered ships or vessels. The main risks covered are liabilities, expenses, and costs specifically incurred by:
P&I insurance is designed to supplement a seagoing vessel's hull and machinery insurance and related coverage. P&I insurance is different from conventional, for-profit marine insurance in that it is based on the not-for-profit principle of mutuality.
In this arrangement, ship owners who are members of the club are both the insurers and the insureds.
As a result, the scope of P&I cover is far-reaching and very cost-effective for its members.
On the flipside, there are unforeseeable events that are not covered by P&I insurance. These include:
A P&I insurance claim may not be honored if P&I club managers believe that the risk or damage should have been covered by other types of insurance. There are at least two types of claims that fall under this category:
P&I insurance does not cover liabilities arising from fraudulent non-delivery of cargo or situations where the insured did not take the necessary steps to limit their liability.
Any claims arising from actions that are considered acts of willful misconduct by the insured are excluded from P&I insurance coverage. These include losses that are intended or where the insured ignored likely outcomes.
Certain criminal liabilities are also not covered unless they meet specific legal standards. Historically, criminal liabilities were not covered unless they involved intentional misconduct.
A P&I insurance claim may be rejected due to the insured not complying with flag state requirements related to marine safety and environmental protection. Such non-compliance could affect their liability coverage under the P&I policy.
As opposed to marine insurers which are for-profit companies that charge customers a premium to fully cover ships and cargo, a P&I club is run as a non-profit cooperative.
Instead of premiums, the insurance for members of the club is financed by “calls”. Club members contribute to the club’s common risk pool according to their Pooling Agreement's rules. This practice is usually enough to finance club members’ coverage for some of the most damaging risks or claims to the shipping industry.
If the risk pool cannot cover current claims, the club members will be asked to pay a further call. Thankfully, since the past year, claims and damages were moderate, so no further calls are needed so far.
Should the pool incur a surplus, the club can ask for a lower call the following year or refund the excess to members. Only ship owners with acceptable reputations are allowed to join a P&I club. Any P&I club member who causes reckless or avoidable losses may be asked to leave.
Shipowners who become members of a P&I club can reap several benefits in terms of liability insurance, such as:
P&I insurance covers liability and claims that many marine insurance providers may not want to cover due to the high risk or simply do not have the financial capability to cover. This can include personal injury or illness of passengers, crew, and third parties, loss or damage to cargo, wreck removals, pollution or environmental damage, and damage to floating objects.
P&I insurance can give ship owners specialized knowledge and support for risk assessment and risk management. Many P&I providers have experienced claims handlers who work with P&I members to navigate claims and offer proactive advice to avoid or minimize losses.
P&I insurers can also provide legal support for navigating complex regulations and liabilities associated with maritime operations. In some cases, some P&I clubs can even share tech tools that help avoid serious risks, like having crew members contract illness during recent pandemic.
With the collective strength of mutual P&I clubs, insurers can cover significant claims, ensuring the financial stability of ship owners. P&I insurance is also a form of license for ship owners, as they typically cannot operate in international waters without it.
There is no set format for P&I coverage, since it is often tailored to fit the insured’s specific coverage needs. In P&I insurance, coverage is bespoke and based on the nature of the risk, ensuring that ship owners pay only for the coverage that suits their specific operational profile.
Another advantage of P&I’s custom nature is that insurers can work with club members to adapt policies as needed and adjust in case there are changes in operational or regulatory requirements.
Here is one of many cases from a publication of the Swedish P&I club:
A bulk carrier was in port and an Able Seaman (AB) was charged with washing the hatch coaming gutter. The AB connected a fire hose to a fire hydrant and was spraying water. The cargo hatch covers were open, but the AB was wearing a safety harness in accordance with safety standards.
However, AB’s harness became tangled with the fire hose, prompting him to briefly unhook it so he could untangle the safety cord. But as the pressure in the hose changed, this caused the AB to lose his balance and fall 16 meters down into the cargo hold. First aid was administered to the AB by the crew and the Cargo Master called for an ambulance. Unfortunately, AB did not recover and died at the hospital.
Multiple P&I claims can be made in this tragic scenario, including compensation for the AB's loss of life, medical expenses, and potential legal costs. The ship owner, co-workers, equipment manufacturers, and regulatory bodies can be held liable if an investigation finds fault, negligence, or a violation of maritime laws on their part.
For ship owners, P&I insurance plays a crucial role in providing coverage against the many risks that come with maritime operations. While it offers an invaluable safety net for claims and can provide reassurance, shipowners must always take the necessary precautions and adhere to all safety regulations.
Since P&I clubs operate on a mutual insurance model, members should avoid actions that could lead to preventable damage or losses. Such actions not only unduly burden the P&I club but can result in the ejection of the errant member, causing them to lose a vital claims facility.
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